I am concerned that the house flipping market may be saturated. There’s a business principle that says the longer a product or service is on the market the less profitable it becomes. Look at the airline industry or fast food or cell phones for example. It’s when the number of “me too” competitors gets to the point that prices are driven down and profits dry up. Could it be that we’ve reached that point in the house flipping game? Was there a time before all the flipping TV shows and books and seminars that people were making a lot of money but not so much anymore?
We have been trying to buy a house to flip for almost a year now to no avail. At first we tried putting up a website and sticking bandit signs around town trying to lure people into selling their house for cash. When that didn't work we scoured the market for houses at below-market value but found none. We went driving for dollars and wrote letters to vacant property owners which went unanswered. Finally we settled on buying a house at a foreclosure auction and have been bidding for the past few months now. What we've been seeing with the foreclosure auctions is people bidding prices up to the point where I don't see how anybody can make a profit. A couple of quick examples, one house was 3 bedrooms 2 baths 1900 square feet that zillow lists at $192,000 ARV (after renovation value) which sold at auction for $146,000. Another house with the same stats and a zillow ARV of $212,000 sold at auction for $144,000. We've tracked recent sale prices of flipped homes in the same neighborhoods as the auctions and they're selling for about 95% of zillow value. Zillow isn't perfect but it gets you in the ballpark, especially when indexed to recent flipped home sales. The point is, in both cases the auction winner has roughly $50,000 to renovate and sell the house which includes renovation costs, realtor fees, insurance, taxes, utilities and other holding costs such as interest on borrowed money. Oh yeah, and that little thing called profit. I don't see how you do that. I've also done some research on the people buying the auction houses and most of them just started flipping in the last year or two.
All of that begs the question, has flipping houses reached its saturation point? Are people trying it and finding out that it’s not as profitable as it looks on television? Should we be looking at other ways to invest in real estate, perhaps something more traditional like buying rental properties? I welcome your thoughts and comments. Thank you.
